Question

How does using options differ from using forward or futures contracts, and what is the difference between options on foreign currency and options on foreign currency futures?

Answer 1

Both future and option contract stands to be useful when it comes to managing the risk. The main difference between these contracts other than the pure mechanics lies in the requisite of what should be done before or on the maturity. Forward and future contract creates an obligation on the seller or buyer of contract to execute certain transaction. The writer of an option should perform a transaction only if the buyer elects execution of the option. The buyer of an option has the preference to let the option expire or to execute the option.

A foreign currency option stands to be the contract provided the buyer of the option the right, however not the obligation to sell or purchase a specific amount of overseas or foreign exchange at a price per unit which is fixed for a particular time period. A foreign currency futures contract on the other hand stands to be an alternative pertaining to the forward contract in which the delivery of standard foreign currency amount in the future at a fixed price, place and time.